Can you please verify our partnership contract?

I will be glad if you give me an expert advice on my proposed business partnership I want to undertake. I have read your detailed Mudharabah contract agreement on Askimam. May Allah reward you most abundantly with good in this world and the hereafter for all the wonderful services you are providing.

My proposal however is slightly different from the Mudharabah contract agreement on askimam in that,

The amount of money is not provided by one person, but the two of us in the partnership.

I already have an ongoing business in this avenue.

I welcomed a financial input from a prospective partner in order to grow the business quickly. The bulk of the money to be invested is mine. Based on the agreement that the profit to made would be shared.

I run the business in its entirety.

My proposal to any prospective partner is that, we would both invest our capital for a 12 month period and whatever profit we make on our investment regardless of the fact that the bulk of the money comes from me and also that I run the business, we will share the profit only for that 12 month at 50% each.

In the event of a loss, the loss is shared in proportion to our investment.

MY contract terminates with this partner after the end of these 12 months, after the profit or loss have been shared accordingly.

Please enlighten me on this.

Answer:

In the Name of Allah, the Most Gracious, the Most Merciful.

As-salāmu ‘alaykum wa-rahmatullāhi wa-barakātuh.

We refer to your email address received on October 10th 2011 regarding the partnership you wish to effect.

The contract you now wish to execute is known as a Mushārakah in the terminology of Islamic finance and commerce.

Musharakah means a joint enterprise formed for conducting some business in which all partners share the profit according to a specific ratio, while the loss is shared according to the ratio of the contribution. In a Mudharabah (silent partnership), capital is invested from one partner only. In a Musharakah (partnership), all partners are injecting some capital.

Let us look at each of the points you enumerated.

1) The first point is valid and it is the correct way of initiating a partnership. By two of you injecting capital into the business it will result in the effecting of a musharakah (partnership) between you two.[i]

2) It is permissible for B to invest into A’s business and form a partnership.[ii]

3) It is permissible for one partner to invest more than the other partner. [iii]

4) The normal principle of musharakah is that every partner has a right to take part in its management and to work for it. However, the partners may agree upon a condition that the management shall be carried out by one of them, and no other partner shall work for the musharakah. But in this case the sleeping partner shall be entitled to the profit only to the extent of his investment, and the ratio of profit allocated to him should not exceed the ratio of his investment.[iv]

5) It is permissible to fix a period of trading of one year.[v] It is not necessary to define a period of how long the partners will be trading for.[vi]

6) In the event of loss, the loss must be according to the proportion of investment. [vii] The famous principle of partnership dictates:

“Loss is distributed exactly according to the ratio of investment and the profit is divided according to the agreement of the partners.”[viii]

7) It is permissible to allocate a time for trading as partners and then at the time of termination to share profits.[ix] The time of distributing profits should be mutually agreed upon. The Shari῾ah has left the distributing of returns at the discretion of the partners. However, the times of distribution must be clearly specified and documented.[x]

We advise you to study the following document to give you the basic grounding on a Mushārakah contract: